US beneficial cargo owners are tapping intermodal and dedicated carriage with over-the-road contract rates rising up to 12 percent and spot market rates as much as 30 percent higher than 2017, a trend reflected by J.B. Hunt Transport Services reporting double-digit growth in both these services.
For the shipper, any option is better than no option. Rollover freight — loads not picked up on the scheduled day to ship — was a problem for many shippers in the first quarter. In April and May, domestic intermodal grew 8.7 percent on a year-over-year basis and 53-foot container traffic rose 6.7 percent. Trailer-on-flatcar, a service that hasn’t been as popular in recent years, grew 21 percent during the two months. Dedicated carriage, which provides a shipper guaranteed capacity in exchange for a multiyear commitment, has also become a popular alternative to guessing when a driver will be available next.
Flatbed demand was unprecedented from May through mid-June, according to carriers. The same happened in produce as cold and wet weather in April caused demand for temperature-controlled trucks to soar in May and June when the weather improved. Dry van is also stronger than 2014 — the last time conditions favored truckers — according to Morgan Stanley Research, which forecasts the trend to continue through December.
“New federal [regulations] have changed the playing field and slowed up deliveries. Driver shortage has confounded nearly everyone, help is needed, somehow,” one shipper told Morgan Stanley analyst Ravi Shanker, speaking on the condition of anonymity.
“Capacity in late June was extremely tight as we work to cover month-end promotional volume. Repositioning costs have gone through the roof and sometimes no amount will capture capacity,” another shipper said.
Given this situation, it’s not surprising that intermodal and dedicated are so popular as an alternative.
J.B. Hunt’s intermodal volume grew 3.9 percent year over year to 520,341 loads. Volume in the eastern half of the United States was the strongest, with volume up nearly 13 percent. Revenue grew 16 percent and operating income grew 22 percent from the prior year. On a sequential basis, intermodal volume grew nearly 5 percent.
More room for rate growth?
Ben Hartford, an industry analyst with Robert W. Baird, believes intermodal rates and volume will grow even more in the second half of the year as contracts kick into place and shippers face a daunting peak season. Union Pacific has already finalized its contractual commitments out of Los Angeles for this year, and while other railroads are more tight lipped, more markets will likely be booked up since domestic container providers are signing their final equipment commitments this month.
Intermodal — often viewed as a cheaper option — saves shippers about 12 to 13 percent versus truckload, less than the historical average of 15 percent, according to Morgan Stanley. On a 10-point capacity scale with one being abundant, five balanced, and 10 extremely tight, shippers gave Morgan Stanley a 7.2 prediction through the end of 2018. One year ago, the six-month outlook was 5.4.
These data bode well for the second quarter for the Class I railroad and the rest of the year.
In the first quarter, J.B. Hunt’s Dedicated Contract Services unit reported revenue climbed 26 percent and loads jumped 15 percent as shippers were willing to sign multiyear contracts to guarantee a truck and driver. The carrier grew its company-owned dedicated trucks 19 percent to 8,383. J.B. Hunt’s for-hire trucking unit, however, saw revenue drop 1 percent, loads fall 15 percent, and truck counts slip 10 percent because the company couldn’t fill 162 trucks.
The difference wasn't as stark in the second quarter. Revenue increased 29 percent, loads increased 3.8 percent, and the carrier increased its average trucks from 7,669 to 8,973. Meanwhile, for-hire truck revenue improved 7 percent with contract rate increases kicking into place and changes in freight mix. The number of loads declined 8.9 percent to 88,301 and average tractors went down from 2,102 to 2,003, but revenue per tractor per week climbed from $3,518 to $3,935.
The data signals that the carrier is putting resources into its dedicated division to satisfy shipper demand with a service that’s easier to staff because of the shorter length of hauls and predictable routes, but also benefiting from the rise in contract rates this year.
J.B. Hunt’s chief rivals in the intermodal and dedicated carriage — Schneider National, Knight-Swift Transportation Holdings, and Hub Group — will report earnings later in July and should see similar strength in the two services.